5 of the worst investing moves you can make right now
Economic uncertainty, ongoing market volatility, continued recession rumblings — what a perfect environment for bad ideas to percolate!
When navigating an unpredictable environment, it’s natural for investors to feel the need to take action to alleviate stress and exert some sense of control. But sometimes the best thing you can do is actively choose not to act.
Here are five of the worst investing moves you can make right now — ones that may provide short-term relief in exchange for long-term regret — and some suggestions for better ways to channel your concerns.
1. Losing sight of long-term goals
Time and again we’ve heard that the biggest investing no-no during market pullbacks is panic-selling out of stocks, which is akin to trying to time the market. What’s the harm in slinking over to the sidelines to wait out the downturn?
Answer: Oof, it’s brutal. Especially for long-term investors.
Here’s how the cash-out-and-wait versus stick-with-it strategies worked out for investors, according to Morgan Stanley research.
The setup: Both the waffler and the buy-and-hold investor contribute $5,000 a year to a retirement from 1980 until the end of February 2025. Spoiler alert: Each earns a respectable 10 to 12 percent average annual return over that time.
The antsy investor who went to cash and waited for the “all-clear” sign — two consecutive years of positive returns — before getting back into stocks ends up with $3.6 million. Not bad, right? But had they simply stuck it out and held through thick and thin like their buy-and-hold pal, they’d be sitting on $6.1 million.
Try this instead
If you have already moved money out of stocks and into cash, don’t try to perfectly time your re-entry with one big lump sum. Often the market starts its upswing before the economy shows obvious signs of recovery, which means you could miss the initial opportunity to make up for losses.
Instead, gradually move money back into your retirement (i.e., dollar-cost averaging), which allows you to pick up shares at different price points along the way.
2. Making retirement withdrawals more costly than they need to be
Recessions can last anywhere from a few months to more than a year. The latest Bankrate Annual Emergency Savings Report found that 19 percent of U.S. adults have no emergency savings at all, which limits their options for accessing cash in a pinch.
If you’re forced to tap your retirement savings early, tread carefully — particularly when it comes to tax-advantaged s like IRAs and 401(k)s: Breaking the protective tax barrier before age 59 ½ can trigger a 10 percent early-withdrawal penalty on top of the taxes you’ll owe.
Try this instead
If possible, draw first from any uninvested cash that’s on the sidelines in a regular taxable brokerage . A non-retirement (as in, one that offers no tax breaks from Uncle Sam) isn’t subject to IRS rules on early withdrawals. As long as you don’t have any gains, you’ll owe no taxes and won’t have to liquidate investments at an inopportune time.
If you must draw money early from an IRA, a Roth is the better choice. Unlike traditional IRAs, Roth IRAs allow penalty-free early withdrawals of your contributions before age 59 ½ if you need to access your money for any reason. Dip into your earnings early, however, and you’ll get hit with the double whammy of early-withdrawal penalties and taxes on earnings.
Workplace retirement plans have more flexible rules about borrowing and some special allowances for early withdrawals. Here’s what to know about the pros and cons of 401(k) loans and early 401(k) withdrawals.
3. Borrowing money to shop the market’s bargain bin
A market downturn can be a great time for opportunistic investors to snag some bargains — but only with cash you’ve designated for that purpose.
Raiding money from your emergency fund or borrowing against the house (buying on margin) to splurge on stocks is risky business, especially during a recession.
- Being “cash poor” when a real-life emergency hits (e.g., the car, fridge or career goes on the fritz) could force you to sell investments — maybe even at a loss if the expected recovery hasn’t yet occurred.
- Buying on margin — borrowing money from your broker to invest in more securities than you can buy with your available cash — carries with it the risk of amplifying your losses if the trade doesn’t go your way. At best, your investments need to outpace the cost of the loan for you to make money. And if your falls below the maintenance margin level (a very real risk in a fast-declining market), you may face a margin call from your broker.
Try this instead
Instead of using this opportunity to get overly aggro, take the time to properly prepare to take advantage of the next dip. (Because you know you’ll get another shot.) Use this five-item checklist to get ready to buy the next inevitable dip.
4. Forgetting to rebalance after big portfolio shifts
There’s a good chance that the carefully crafted portfolio based on your desired mix of diversified assets may have little resemblance to the one you end up with during and after a recession.
Market fluctuations will do that: Stock values fall, bond values rise, and the shifts throw your asset allocation out of whack.
Sure, the ship might eventually right itself. But failing to rebalance your portfolio and realign your holdings to reflect your time horizon and risk tolerance can potentially delay the recovery from the market’s decline. At the same time, you want to be careful about adjusting too often, which can lead to speculative investing and can generate excessive taxes in some investment s.
Try this instead
Set your portfolio rebalancing guidelines in advance — be it annually, quarterly or when an allocation drifts more than a certain percentage from the desired weight. Make it your go-to playbook to follow during good and bad economic times. And consider these tips to recession-proof your retirement savings.
5. Accepting discomfort as par for the course
The temptation to tinker with your long-term investing game plan is natural in the midst of economic turmoil. But if you still have a pit in your stomach months or years after the dust settles, don’t dismiss it.
That lingering discomfort could be a sign that the financial plan you’ve been following needs to change. Maybe it’s simply out of date and no longer appropriate for your current life stage. Perhaps it was never dialed in correctly in the first place. It’s common for people to misjudge their tolerance for market volatility.
Try this instead
If you don’t have a financial plan — a roap that helps you optimize your resources and debts to achieve your near- and long-term goals — that’s your first step. You can go the DIY route and use financial planning software to craft a plan or work with a financial advisor to put one together.
Keep in mind that a financial plan is a living document, not a set of instructions written in stone. Just like a portfolio that needs to be rebalanced, you should review your finance plan annually or semi-annually to make any necessary adjustments.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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